ABT Auto Investments Limited vs. Aapico Investment Pte Ltd and Ors [2022] EWHC 2839 (Comm.)

Welcome to the December edition of In the Know, Baker McKenzie's Leveraged Finance newsletter that analyzes significant trends and salient legal issues for participants in leveraged finance and high-yield markets around the globe.

A cross-practice group in the London office of Baker McKenzie — led by Restructuring Partner Priyanka Usmani, Disputes Resolution Partner Charles Thomson and Banking Partner Matthew Cox — acted for Aapico and succeeded in their argument that the company validly appropriated shares in a private company under the The Financial Collateral Arrangements (No. 2) Regulations 2003 ("Regulations").

Key takeaways

  • This is the first time that the English courts have had the opportunity to consider the meaning of the term 'commercially reasonable manner' in the context of its use in Regulation 18 of the Regulations, which governs how a collateral taker must value financial collateral that it is appropriating.
  • The judgment is particularly significant because neither the Regulations, nor the EU directive behind them, contains a definition of or direction on what constitutes a 'commercially reasonable manner'.
  • The judge provided the following guidance on the meaning of the phrase 'commercially reasonable manner' as used in the context of the Regulations:
    • What is commercially reasonable, in any given case, is 'fact sensitive'.
    • The statutory requirement is as simply stated: The valuation must be carried out (i) in accordance with the terms of the security financial collateral arrangement; and (ii) in any event in a 'commercially reasonable manner'.
    • There is no room to imply any equitable or other duties associated with the English law of mortgage nor any additional requirement for the collateral taker to act in good faith.
    • The requirement imports an 'objective standard', meaning that the views of the collateral taker (or any third-party valuer) is irrelevant. But the responsibility for the valuation lies solely with the collateral taker and it cannot discharge its duty in such respect by appointing a third-party valuer.
    • The requirement applies to the way in which the valuation is made, and this does not mean that the resulting valuation itself must necessarily be a commercially reasonable one.
  • The judge made clear that non-compliance with the valuation criteria set out in Regulation 18 will not in itself invalidate any appropriation effected in accordance with the right to appropriate under Regulation 17 and the relevant security financial collateral arrangement (as defined in the Regulations), although it may subsequently result in the valuation being set aside.
  • Ultimately, the judge found that the appropriation by Aapico was entirely valid and that the valuation in the circumstance had been carried out in accordance with the security financial collateral arrangement and in a commercially reasonable manner as required by Regulation 18.
  • These findings help to strengthen the value of the self-help remedy of appropriation that was introduced into English law by the Regulations, allowing a collateral taker to take ownership of certain secured assets without the need to turn to the courts.
  • Lenders and borrowers alike should welcome the greater clarity that the guidance provided by the judge in this case has brought to the application of Regulations 17 and 18 of the Regulations and, in particular, the meaning of the phrase 'commercially reasonable manner'.
  • The parties relied on separate expert valuations (with different outcomes), and the judge directed the valuers to prepare a joint memorandum setting out the matters on which they agreed and did not agree. This approach to valuations also has potential application for disputed valuations in other contexts (such as part of a restructuring plan), potentially reducing the number of issues that a judge needs to consider in complex disputes.

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